The balancing act that is real estate
June 16, 2014
In a recent article I read on real estate, the author summed up his views by saying “It’s a good time to buy and sell.”
Every time I hear this claim from somebody, I shake my head in disbelief.
It ranks right up there in the land of fairy-tale claims with “they ain’t making any more beach property” and “of course the fish is fresh.”
The reality is, regardless of the asset in question, it is either a good time to sell or a good time to buy, but never both. There cannot exist in free markets a buyers’ and sellers’ market at the same time.
Free markets are always in flux, and for it to be a good time to buy and sell at the same time would mean the market is in perfect equilibrium. That would mean prices are neither rising nor falling, which in a free market is a condition that rarely exists, if ever, and when it does exist, market mechanisms quickly revert prices back, moving again in either one direction or the other.
If prices were truly stable (in equilibrium) and not going up or down — which would have to occur for it to be a good time to sell and buy — potential buyers would hold off buying until the perfect time for them to purchase. In real estate, it would be waiting for that perfect house or waiting until their financial condition was absolutely as good as it could be. Not fearing price increases, they would have all the time in the world.
This delay in turn would dampen demand. The same condition would exist for sellers. Since they could always obtain the same price, there would be no rush to sell, fearing lower prices later.
In this fairy-tale condition of market equilibrium, there would be no rush to move by either party. This delay by both buyers and sellers would obviously slow sales and that would then show up in the market in falling prices, a state of disequilibrium once again.
Since disequilibrium is the state where prices are rising or falling, we defer to which direction prices are moving to determine whether it is a good time to be a buyer or a seller.
We only have to review the old economic adage of “sell when everyone is buying and buy when everyone is selling” to learn when it is a sellers’ market or a buyers’ market.
Simply put, a buyers’ market exists when prices are falling due to increased supply and/or falling demand. A sellers’ market exists when prices are rising and/or supply is dwindling.
Just think back to the real estate boom before the bust. Demand for homes was skyrocketing due to the mania, yet homebuilders could not build homes fast enough.
Although you were told it was a good time to buy and sell, the market truth soon became know. Since it can never be (and it wasn’t) a good time to sell and buy, homebuyers found out the bubble was in actuality a sellers’ market and buyers got left holding the proverbial bag.
Free market dynamics (without intervention, of course) always work to balance out imbalances in supply and demand. Increased demand will raise prices making prices (homes in this example) less affordable and therefore slow demand. Meanwhile, suppliers, seeing increased profit, will increase production (homebuilders in this example) and the added supply will also put a damper on rising prices.
In cases where demand falls or supply increases, prices will fall in response. This fall in prices will then start increasing demand back up again, once again in a market attempt to correct the supply and demand factors.
Although prices are always seeking equilibrium, they will not remain there for long. The constant and ongoing movement of supply and demand will constantly cause prices to move one way or another.
Since prices will never stay the same for long in a free market, the state of equilibrium, whether it is in real estate, bananas or what–have-you cannot exist. This is why it is impossible for it to be a good time to buy and a good time to sell simultaneously, let alone in a major asset group like real estate. For anyone to claim this is absolute nonsense.
To find out whether it is a sellers’ or buyers’ market in the asset you’re looking at, find out at which way prices, demand and supply are headed.
This article expresses the opinions of Marc Cuniberti. He hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM at noon Thursdays and syndicated on more than 30 radio stations throughout the U.S. His website is http://www.moneymanagementradio.com.